I am 59 years old and believe that I need to “catch” up some to have a comfortable retirement. I have been contributing $23,000/year to retirement account at work through AIG Valic(only option. I have a variable annuity income lock investment with them. Periodically I will contribute to a separate 401 K regular and Roth IRA investment vehicle through another company. I do not have a financial advisor or accountant. My question is, I am leaning to putting new investments in large, solid “blue chip” dividend producing companies such as Johnson and Johnson, Proctor and Gamble, Baxter,Dover with plans to diversify into energy companies and REITS. Is this a sound strategy or can you offer some suggestions. Thank you for any help.
You are right that blue chip stocks are a good investment when you’re looking for more stability. These are big companies with many different product lines. They have the ability to wait out bad times and buy out competitors before they become a major threat. They also pay a good dividend. This means that if you get into a period where stock prices are going nowhere you’ll still have income from the company. which is important when you’re retired and need to pay expenses whether the economy is growing or not. An ideal situation for a retiree is to have enough dividends and interest payments coming in to pay for expenses so that you don’t need to sell shares of stock for cash. You just write checks or use a debit card to pay for things from the account and then magically the cash in the account is replenished by dividends and interest payments that come in.
That said, even big companies run into trouble. Shareholders in General Motors and General Electric, giant companies that looked unstoppable, saw sudden drops in the price of their stocks during the 2008 credit market collapse due to the large numbers of loans these companies had made. They are safer than young companies, but there is always the chance that a single company stock could lose 90% of its value or more very rapidly, so you need to spread your investments out and not have any more invested in one company than you could afford to lose. Mutual funds are a good way to do this, and there are mutual funds that invest in income producing assets (I’ve held the Duff and Phelps Income fund (DNP) for about 25 years now) and also ETFs and Index Funds that favor large companies (like the Vanguard S&P500 Fund and the corresponding ETF). If you go with the individual stock route, I would have at least 10 different stocks in your portfolio – 20 would be better.
Energy is getting killed right now with oil prices declining. I invested in Cameco (CCJ), a large Canadian Uranium producer, as a way to both invest in the energy market and have a hedge against inflation (uranium prices, like all commodities, will increase in price if there is inflation) a few years ago with bad results so far. I’ve also taken up positions in Oasis Petroleum (OAS) and Enesco (ESV), but I think I may have bought in too late for the current rally and am sitting on losing positions right now. I’ll reevaluate these soon and decide if I should stay pat, invest more, or sell out. I like energy long-term as an inflation hedge, so I’ll probably stay invested. That’s the beauty of long-term investing – it makes decisions a lot easier. Energy companies also tend to pay large dividends since they generate so much cash, so holding isn’t a bad thing.
I always like REITs as another way to generate income, as an inflation hedge, and as a non-correlated asset to stocks. These will not generate the returns of stocks over long periods of time, but the returns are very respectable when compared with bonds. Some of these can be volatile, however, so buying a handfull of them, keeping them as a relatively small portion of your portfolio, and buying them in a mutual fund of REITs instead of picking individual REITs are considerations you should make.
Let me finally say that there is nothing like cash when you are retired. If you have a year or two worth of cash assets (money market funds or CDs) you can wait out dips in the market. You can even have 3-5 year’s worth stored up if you want to be more cautious.
Thanks for reading and best of luck.
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Disclaimer: This blog is not meant to give financial planning advice; it gives information on investing, personal finance, and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.